To Ensure Wishes for Their Estates Are Met, Divorcees Must Consider Beneficiary Designations

Many people incorrectly contain their idea of estate planning entirely within the process of creating a will. They feel that as long as their will reflects their current wishes, they can rest assured that their rightful heirs will inherit their assets.

But in fact, many investment accounts, including 401(k) accounts and individual retirement accounts (IRAs), have beneficiary provisions that supersede wills. These provisions are sometimes called “substitute wills” because of their ironclad legal status.

Beneficiary designations on investment accounts are an important and useful estate planning tool. They enable the probate process to be bypassed for those assets, meaning their transfer to beneficiaries is quick and easy, with a minimum of paperwork or legal hassle. But just as efficiently as these provisions can bring about the decedent’s wishes, they can bestow assets upon the wrong person if they are not kept up to date.

This potential problem is aptly illustrated in cases of divorce. If someone names his or her spouse as beneficiary, then gets a divorce, but fails to change beneficiaries, the ex-spouse could inherit the bulk of the estate.

In a different example, a man has children from a previous marriage. He has since divorced and remarried. Because the law dictates that his 401(k) goes to his current wife by default, he must file certain paperwork if he instead wishes to leave the funds to his children. A prenuptial agreement to this effect is not enough; the man’s current wife must specifically relinquish her claim on the account.

The following must be considered to ensure retirement account assets go to the right people:

Beneficiary designations and wills should work together to form a cohesive estate plan. The estate itself may be designated as the beneficiary. This is useful when assets must be distributed in specific ways to achieve specific goals — to, for example, minimize taxes or qualify a special-needs child for government benefits.

A will should reflect and confirm beneficiary designations to minimize disagreement.

Divorcees should update the beneficiaries on their retirement accounts to reflect their current wishes.

Married and remarried individuals who wish to leave their 401(k) accounts to anyone other than their current spouses must file specific paperwork to that effect.